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If Obama Can Just Create A Trillion Dollar Coin, Then Why Do We Have To Pay Taxes?

If Barack Obama can "solve" the debt ceiling crisis by printing up
some trillion dollar coins, then why does the federal government need
our money? As another debt ceiling showdown approaches, many in the
liberal media are suggesting that if Congress does not raise the debt
ceiling that Obama should just have the U.S. Treasury create a trillion
dollar platinum coin and use it to pay our bills. It sounds crazy, but
many notable voices (including Paul Krugman of the New York Times)
are supporting this idea. But if the federal government has had the
power to create trillion dollar coins out of thin air all this time,
then why do we have to pay taxes? Not only that, why do we have a
national debt? If the federal government can just create money whenever
it wants, then why does the federal government ever have to borrow it
from others? The U.S. Constitution actually grants Congress the power
to "coin money", so why is the Federal Reserve doing it?

Those are some
very important questions. Most Americans don't even realize that the
U.S. government never actually needed to borrow a single penny from
anyone else. The U.S. Congress has the authority to create debt-free
money whenever it wants to. Conceivably, the entire federal government
could be funded without ever borrowing a single dollar and without ever
receiving a single dollar from any of us in taxes. Just imagine that - a
nation without a single penny of national debt, no income tax and no
IRS. What a wonderful world that would be. Of course there would be
other potential dangers under such a system (such as runaway inflation),
and those dangers would have to be addressed. But the truth is that we
don't have to have an income tax or 16 trillion dollars of government
debt. We only have those things because we have chosen to have those
things.

Sometimes, a crisis can illuminate options that most people had not
considered previously. As another debt ceiling crisis draws closer,
many are looking for ways for the U.S. government to be able to continue
to pay its bills if Congress does not authorize an increase in the debt
ceiling.

If a debt ceiling agreement is not worked out, the U.S. government
will soon only be able to pay about half the bills that are coming due
after interest payments on the national debt (which will almost
certainly be prioritized) are made.

That is why a lot of people on the left are pushing the "trillion
dollar coin" alternative. So how would this work exactly? The
mechanics were recently explained by Jim Pethokoukis on his American Enterprise Institute blog...

There are limits on how much paper money the U.S. can
circulate and rules that govern coinage on gold, silver, and copper.
BUT, the Treasury has broad discretion on coins made from platinum. The
theory goes that the U.S. Mint would create a handful of trillion
dollar (or more) platinum coins. The President would then order the
coins deposited at the Fed, who would then put the coin(s) in the
Treasury who now can pay all their bills and a default is removed from
the equation. The effects on the currency market and inflation are
unclear, to say the least.

In my opinion, if anyone in the federal government is going to be
creating money out of thin air, it should be the U.S. Congress. After
all, according to Article I, Section 8 of the U.S. Constitution,
it is the U.S. Congress that has been granted the authority to "coin
Money, regulate the Value thereof, and of foreign Coin, and fix the
Standard of Weights and Measures".

But those that are pushing Obama to create a "trillion dollar coin"
point to a law that Congress passed that allows the U.S. Treasury to
mint platinum coins. The following is from a recent CNN article...

Normally, the Federal Reserve is charged with issuing currency. But U.S. law, specifically 31 USC § 5112, also grants Treasury permission to "mint and issue platinum bullion coins and proof platinum coins."
This section of law was meant to allow for the printing of
commemorative coins and the like. But the Treasury Secretary has the
authority to mint these coins in any denomination he or she sees fit.

But it wouldn't quite be that easy. According to a recent ABC News article, some elements of the coin design would have to be determined by legislation...

The more difficult part comes sometime after the decision
is made to coin the platinum and before the Mint gets to work in
sculpting the pieces.
At that point, the American people must decide whose face will adorn
the trillion dollar trinket. The process to determine the “specs” of the
coin, U.S. Mint Public Affairs Specialist Genevieve Billia warns, must
be “determined by legislation,” creating the potential for another
congressional impasse.

So we would likely end up back at square one.
But if printing up a "trillion dollar coin" does not work out, Paul Krugman of the New York Times has come up with another option...

Don’t like the platinum coin option? Here’s a
functionally equivalent alternative: have the Treasury sell pieces of
paper labeled “moral obligation coupons”, which declare the intention of
the government to redeem these coupons at face value in one year.
It should be clearly stated on the coupons that the government has
no, repeat no, legal obligation to pay anything at all; you see, they’re
not debt, and therefore don’t count against the debt limit. But that
shouldn’t keep them from having substantial market value.

Of course there is a very, very low probability that any of these
wild ideas will ever be tried, but this debate has raised some very
interesting points.

The truth is that we do not have to have a system where more money is only created when more debt is created. We could have a system where the federal government directly creates debt-free money that is spent directly into circulation by the federal government.

In fact, this has happened before.

As I have written about previously,
during the presidency of JFK a limited number of debt-free United
States Notes were issued by the U.S. Treasury and spent by the U.S.
government directly into circulation without any new debt being
created. In fact, each bill said "United States Note" right at the top.

Unfortunately, after JFK's presidency no more debt-free United States Notes were ever issued.

But even before JFK, there were times when debt-free United States Notes were being used. According to Wikipedia, United States Notes were first used during the Civil War....

They were originally issued directly into circulation
by the U.S. Treasury to pay expenses incurred by the Union during the
American Civil War. Over the next century, the legislation governing
these notes was modified many times and numerous versions have been
issued by the Treasury.

So why are we using debt-based Federal Reserve Notes today instead of debt-free United States Notes?
If the Federal Reserve did not exist and the U.S. government directly
created money instead of borrowing it, it is conceivable that we could
have a national debt of $0.00 today instead of $16,432,707,263,449.56.

Which option do you think our children and our grandchildren will wish that we had opted for?

In a system where the government directly created money, it is also
conceivable that we could completely do away with the income tax and the
IRS completely. The U.S. once prospered greatly without an income tax,
and it could do so again.

And the truth is that our system of taxation is broken beyond repair. If you doubt this, just read this article.
So what would the downside be to such a system? Well, of course
rampant inflation would be a huge danger. Allowing Congress to print up
money whenever they wanted to would be playing with fire. That is why
it would be imperative for there to be a hard cap on what the federal
government could spend. For example, you could set the cap on spending
by the federal government at 20 percent of GDP. That way we would
hopefully never end up looking like the Weimar Republic.

And the current federal debt could be paid down a little at a time
using newly created debt-free currency. This would have to be done
slowly to keep inflation under control, but it could be done.

Of course if you wanted to continue to fund the federal government
through taxation, there are other options that would still allow you to
do away with the income tax. For example, one of the ways that our
founders intended for the federal government to be funded was through
tariffs, and we could definitely raise a lot of money that way. Plus,
that would have the added benefit of making American companies much more
competitive again and it would reduce the flow of American jobs out of the country.

So am I in favor of having Barack Obama create a trillion dollar coin to get around the debt ceiling crisis?
Most definitely not. If it does not violate the letter of the
Constitution (which I believe it does), it sure does violate the spirit
of it.

But if the U.S. Congress decided to shut down the Federal Reserve and
the IRS and they decided to abolish the income tax, and instead they
started directly issuing debt-free currency directly into circulation,
that is something I would very much be in favor of.

Yes, that system would not be perfect either, but it would be far more preferable to what we have today.
So what do you think? Should we keep our current system of debt-based money, or would a system of debt-free money be better?